30 Sep 2020
Tokio Marine Kiln’s Aoife Woulfe, Aon’s Ian Lewis, and Safeguard IP’s David Bloom give their view of the state of...
Insurance Day Business Briefing: London
A panel of experts from the insurance world discuss change and transformation in the London Market at the Insurance Day Business Briefing.
Don't have time to watch? See the full transcript below.
Grahame from where you sit and looking at the clients that you are dealing with, where are they thinking about profit?
Well I think, again, we’re not a London broker and we’re not a wholesale broker, we’re not a retail broker. Effectively, we’re a global treaty and portfolio broker. So, when I look at that and we’re supporting some pretty interesting businesses. Some of those, you would put in the classification of InsurTech. I’m not sure they’re InsurTech, they are more new methods of distribution of our product. So, there are new ways we can distribute the product and bring traditional underwriting capital to support that and bring new underwriting capital to support that.
I think what’s interesting, everybody talks about the benign Cat period that we’ve had. Well actually it hasn’t been a benign Cat period, it’s been a benign Cat period in areas of heavy insurance penetration. And if you actually look around the world in the past 10 years, there has been plenty of catastrophes, there’s just been very low insurance penetration in those areas. So, you’ve got to look at that and say there is an enormous opportunity there. The problem with those areas is a lot of the population tend to be at the lower end of the income spectrum and therefore, they need to buy product at a price they can afford to buy that product. And I think as we look at innovation, and we look at much lower costs of getting to those customers, there is opportunity there. So, there is plenty of opportunity for this industry.
It’s going to be difficult seize all that opportunity unless the industry does change. Realistically, it’s going to be difficult to go along to a low-income base country that has got Cat exposure and say, “I tell you what, 45% to 50% of everything you buy goes in the industry cost.” We should come back to the fact that, at the end of the day, we have to tackle the expense base in this industry. And that’s going to come through new forms of distribution. It’s going to come through really understanding data; it’s going to come from getting that original retail client to end underwriting capital in a much more effective and efficient and low-cost way.
So, tons of potential for this industry and every time we talk about situations where capital seizes up in our industry, you get a situation where the economy and the government has to step in, which tells you how valuable this industry is actually. And we’ve seen that multiple times, whether it is Pool RE, Flood Re, post-September 11, I think what we all have is an incumbent responsibility to say, “Where can we as a private industry support risk?” Because we don’t ultimately want the government to step in because we can’t get our act together to do that.
How important is technology in achieving that, or is it other things that need to be addressed for London to tap into these opportunities?
I think technology is going to be critical. I think it’s going to be critical in the expense chain; I think it’s going to be critical in new distribution methods; it’s going to be critical in data. The bit that connects underwriting capital ultimately to risk, is going to be an understanding of that risk and critical to that is data. So, when we talk about InsurTech, it’s at all stages. Blockchain… I do think TOM is a worthy cause, the only issue is that I don’t think we should be looking to automate what we have already got, we should be thinking about where the world is moving. I have to tell you, I’ve got this book Blockchain Revolution, I said this last week, I’ve read the first chapter five times and I still can’t understand it, but I think it is real. I wish I knew why it was real, but I think it’s real. So, from that point of view, it is going to impact our business massively, including risk assessment, you go on and on. It’s going to impact us massively ion the next five or ten years.
Yeah, I think we tend to be slightly complacent at times. I think that we do a really poor job of selling insurance out into the public arena. I think if you look at the industry, it has behaved incredibly well through catastrophes all over the world and basically without insurance the world wouldn’t exist as it is today. So, it is massively important in GDP growth, in building infrastructure. I mean we have got to be careful because in London we are losing market share for reinsurance and we are losing market share for emerging markets. We have got to be much more proactive in going to these local markets and I think it is all about finding the right partners, finding the right people, understanding the local knowledge, that’s really important.
One of the things that’s been highlighted in recent catastrophes, is the huge differential in economic to insure loss, there is a vast gap there. So, if you take California, I think it’s a 9% uptake of earthquake cover in California; that leaves a huge opportunity for this industry. If you look at Florida, anybody owning a house in Florida, maybe not so many of us here, but they have to buy three policies for their actual building, for the contents and if they want excess flood, they’ve got to buy a separate policy. Three policies, are they going to do that? And then when they do buy a policy, they get a document like this, are they going to go through it? Are they actually going to get the cover when the loss happens? So, I think there is a massive opportunity to close that gap and I think, also, moving risk out of government into the private sector is another vast opportunity for us.
I think talking about the importance of technology, it’s absolutely critical. I think we’re all aware, if you look at the way the world’s moving and moving so incredibly fast. We’ve had more data at our finger tips and we are more connected then we have ever been. And actually, we’ll have less information today and less connected today than we’ll be tomorrow. That’s the speed at which things are moving. And if you look at predictive analytics and you look at what that provides: risk mitigation, claims management, pricing tools. You look at what’s going on in the world of artificial intelligence, machine learning, it’s staggering what’s coming out of this. Big data, Google and Amazon, are they going to start disrupting us? Cloud computing, again Google, Amazon, Oracle, all these companies. Then you move into the world of telematics, sensors: sensors in cars, sensors in cargo, sensors in aviation, autonomous vehicles. There are going to be driverless cars. What about planes? What about trains? There are just so many things going on and drones. There is so much opportunity and so many exciting things and products that don’t exist today that will be existing. I think where we’ve got to be, is far more creative in finding those products, exactly as Grahame says, taking risk to capital far quicker and far more efficiently and faster because if we don’t do it somebody else will do it.
And what do you believe is holding, if anything is, holding the market back from doing that?
Probably fear in some ways, I think there’s a fear of changing things. And I think the word disruption is a great word in many ways because people are nervous of change, we are not great at changing things, we all like doing the same old thing, “We’ve done it this way for twenty years, so it works, so let’s leave it.” But actually, we’re getting left behind, you just watch things like Amazon, it’s an extraordinary company. Airbnb, Uber, what have they done? How have they disrupted things? Estate agents, they’re being disrupted. People want things on hand held devices. The next generation will be totally different from our generation and they want things faster and we have to adapt to that. I think that comes right back into companies embracing the thoughts of young people. And allowing them to be creative and open up their ideas and challenge the management about new ways of doing things and more effective ways and probably more cost-efficient ways.
I think it is true to say that probably 90% of change happens through adversity or disruption. It’s not very often you see people go, “I tell you what, I have got fantastic foresight and I’m going to change.” So, most of it happens through adversity or disruption; I suspect we are going to have a bit of both. So, we’re going to have to get real.
And the products, there are so many products, you’ve got flood, you’ve got cyber, you’ve got business interruption, there is just a whole multitude of things to be done.
So, Nicolas, how do you overcome the fear.
I think the points have been really well made and by the way from a London Market Group point-of-view, those are exactly the topics that we are working on. And I love the fact that it was mentioned that we’ve got major growth support opportunities in both emerging markets but also, so called, mature markets that are in fact not so mature, in fact. And that could learn eventually from emerging markets, which are maybe less emerging that what we feel. But think that the huge challenge for us is that, if we are very honest, there is so much happening, so much complexity, that our teams, I would say, on a day-to-day basis are heavily geared to things that are imperative in the business-as-usual environment in terms of improvement. And all of us that have been leading a lot of change in the last, probably twenty years and we’ve all been seeing and saying that the acceleration of change has been really impressive; we’ve been coping.
But back to Grahame’s point a few minutes ago, I think the problem is that here we are facing a situation, where unfortunately it’s not about changing it’s about transforming. And it’s much more complex because you need to run your business-as-usual, while at the same exact moment, you are totally reinventing the way you process the business, the way you run the business, the way you consider things, the way you look at things.
So, it’s much more than the complexity that we faced in the past, where we had some change agents and we had some resistance to change. Here I think Grahame was very humble in what he was saying, and I think I am facing exactly the same thing when I am reading some stuff, is that it is very difficult to compute on what is the opportunity. You feel it, you understand that there is something to do but really, how structuring it so that it truly works, rapidly. So that you are not yourself destructing your quality, or delivery on the permanent business-as-usual job. This is really what is the complexity; moving from changing to transforming.
In the past we didn’t like too much the word transformation because it was looking to be too brutal and it is creating a lot of fear in the system. But we need to recognise that if we are not clear about the kind of transformation we want to go for, we are creating this fear anyway. Because guess what, people are underwriting on the trading floor over there. They are very smart people and they understand that in just a few years this is going to change, for some of them that want this environment because what they like is trading, discussing, negotiating, that going to be a big personal decision.
So, we’ve a lot of technology matters but we’ve also got a lot of sociological matters: how are we addressing with what the workforce is today and what it could be about tomorrow? How do we help our colleagues to move from a situation in a certain type of job today to another type of job? So, it’s not only technology in a way, if it would only be about technology, it would be simple; it’s much more complex than that.
That sounds like you need a cultural change within organisations to approach that, how do you achieve that?
Well you achieve, first of all, by really being really clear on the vision and I think one of the changes at the moment is that if we are quite honest, as I said, we know that we need to do something that is not yet absolutely clear what we can do. So, when you miss already these elements, it is difficult to start because it is difficult to bring on everybody with you on the journey. So, I think we need to much smarter on defining what is the vision for coming years and some of us are doing that on a market point-of-view, or on our respective companies, so that we can bring people on a cultural transformation. But we need to show what’s going to be the end start? Or how it could be? And what’s going to be appealing as this end state.
Can I just say that I think that’s spot on. I think for me, IT is one thing InsurTech, etc., but there is also culture and the cultural piece is soft, so people they tend to try to ignore it. It’s really, really, difficult. So, for me it is about talent, talent funnel. We talk about the underwriter of the future, a lot of very, very, smart people in here. Looking at one particularly smart actuary at the moment; at some point where does that go? Looking at, I was a reinsurance broker in the 80s and it was all about getting on planes and having lunch with people, I suspect it’s a bit more complicated now than it was.
No not really.
Probably not… But my point is we shouldn’t do ourselves down because I think that the culture of the market has changed positively over a period of time but it needs to change further. My background was in emerging markets, and reading the London Markets’ report, it was depressing to see that there’s really there is no strategy around emerging markets. And I mention the phrase Anglophone before, I mean this is a British institution that we are sitting in right now. How on earth can we really attract SME business out of Latin America into London and compete on an equal cost footing with some of the global and regional composites that work there? We don’t understand the culture. As far as we are concerned it’s all a bit too cheap and it’s easier to just do the US, or let’s do something in Europe.
In a sense we’ve got too much choice. To my mind we are not hiring enough people with right skill base and I don’t just mean clever mathematicians and actuaries. But we’re not culturally we are not hiring people with different language skills, whether it’s in broking or in underwriting. So, I don’t see how we are going to crack the nut of getting into decently profitable business from around the world, if we continue our focus on the Anglophone, particularly US, predominantly US; relying on a cycle, which is feast and famine.
The cultural imperative is crucial, maybe some of the people in this room don’t like hearing what I am saying, because we’re all wearing suits and we are all of a particular type. But the reality is that unless we can create some empathy with the markets around the world, London just looks remote, difficult to access and very British, just too hard and we don’t like it. And actually, as we know, for certain quarters of the world, particularly the continent, a degree of mistrust as well. We need to get over that, otherwise we are just going to be what we are, and we’ll just make it cheaper and cheaper and cheaper, but we won’t open our, the aegis of our market.
Is part of that having more of a presence in overseas markets or is that…?
Yes, absolutely but a presence absolutely. But I’m talking about the London Markets, so once you have a presence in overseas markets, you stop being the London Market. The London Market needs to make itself far more accessible. I hear what you say around TOM being doing what we do better, but actually that wouldn’t be a bad start.
I’m not saying we shouldn’t do it, I’m just saying it’s not the only solution.
Absolutely but even if we get that right, we can start to bring our capacities and our capabilities more in line with local markets, rather than having a huge, long chain of distribution, with relatively little value added in each link, it’s not tenable for the future.
I think you do have to look at the fact that London, what is London? Really at the end of the day, there’s some huge advantages that we should absolutely concentrate on. It’s still got unbelievable underwriting talent. It sits in the middle of a very global financial centre. The place that we are sitting in has one very valuable thing, which sometimes people underestimate, it has global licensing. Which, actually, getting underwriting capital to distribution is pretty important and its still got a pretty good rating. I think we need to concentrate on those fundamentals; but then we need to think about how we apply those fundamentals and that is going to change massively.
I don’t know, I mean big organisations, I spent 27 years in a big organisation and I know how hard it is to change a big organisation. And why start-ups succeed so well in times of disruption in industries because that culture is grown from the start, that you need the culture to grow with that opportunity. I think there maybe a sense where, in some of the larger organisations, you almost have to incubate a new effective start-up in place, alongside the old because you sort of do need to run both together I think.
And I haven’t got all the answers to actually how you do that now but certainly I don’t think… It’s not easy to take what’s done a business this way for so many years and make it do it that way, even though this way still has fantastic skills in it. It’s just very difficult to take a chip out of here, put it on the side and put a new one in. We all know it’s difficult.
Can I come back to the opportunity because we are very honest the four of us, regarding the difficulty and complexity but I think I’d like to give a bit of positive and optimism here. Because, as Grahame just said, as all we just said, if there is a market that can project itself to the rest of the world, this is this one and only this one. Let’s remember that we are the only globally relevant, or potentially relevant, to be humble, market in the world. It’s not to say that the other international hubs do not have projection capabilities but nothing to compare with ours. So, we have missed some opportunities, but I think we are quite conscious and humble about the fact that we have missed some opportunities in both emerging and mature markets in the last decade probably.
We are also very clear on the lack of diversity that we have in this market and this is so right if we want to be relevant to other markets, we need to speak their language, we need to share their culture. So, we need to bring a lot of people that are relevant for these markets here but also, we need to re-explain what we are. You would remember that just two weeks ago, we launched the branding of the London Market, that ‘London Makes It Possible’. We did that very consciously, internally in London, in the square mile, to kind of re-promote what we are within our self. But clearly our plan is to project that with all the partners, all the stakeholders of the market, to the relevant markets in the future. The opportunity is immense. So, if we do the things that were working on, at the moment, are quite right that’s going to be very successful.
But we need, probably to restore a bit of swagger here. In the past, the London Market was too complacent; it’s been almost a little bit too masochistic in the last two years, because not that we are aware of the issues we are maybe a little bit less offensive. And if we restore the mojo, I mean there is clearly an enormous opportunity for us, and by the way part of it is going to come from Brexit, which is an issue as we know. But in addition to the licensing that we have here, and this is unique, we have also the opportunity to build new forms of trading with literally any nations in the world. It’s going to create a lot of flexibility to the London Market, to the UK as a whole but to the London Market specifically. So, there are a lot of things that we can absolutely leverage in a very short time frame.